What Should You Make Of Latest Developments At Citigroup Inc (C)?

Citigroup Inc (NYSE:C) has come a long way after the financial crisis struck. A lot of things have happened in the past seven years as far as the bank was concerned as it divested a number of units. The company is still in the process of restructuring some unviable units. For instance, the bank is said to be slashing its workforce by 2,000 early next year. That clearly suggested that it meant business and did not want to lag behind its rivals. It is one of the four biggest banks and naturally should gain from the recent hike. However, the pace of further interest rate hikes would dictate the course or the extent of gains that each and every bank would witness in the coming quarters. None-the-less, it was a good beginning considering that the financial institutions had to settle for the lower interest rate for a long time.

Net Interest Margin

The Federal Reserve’s move is meant to boost the net interest margin of any financial institution, including Citigroup Inc (NYSE:C). However, it depends on the amount of interest payable towards interest for the deposits and the amount of interest earned on the amount lent. Most of the banks were waiting for the much-awaited interest rate hike to put immediately into effect. As a result, the company also boosted its prime lending rate immediately after the rate hike announcement. The Fed is expected to announce another 75 basis points of rate hikes next year in three phases. However, its CFO appears to have some doubts during a recent conference about the phase of the announcement of further rate hikes.

In the last two years, Citigroup Inc (NYSE:C) managed to improve its net interest margin (NIM) steadily. For instance, its NIM was 2.81% in the third quarter of the year 2013. That improved to 2.91% in the following year’s third quarter and further enhanced to 2.94% at the end of the current year’s September quarter. Except for a couple of quarters, the bank maintained a steady growth in NIM in the last eight quarters even without any increase in a rate hike. The company has already increased its prime lending rate by 25 basis points to 3.5%, and its impact can be seen partly in the current quarter’s performance. Therefore, it is quite likely that the company might gain another 20 basis points in NIM. Significantly, the bank’s NIM was better than JPMorgan Chase & Co. (NYSE:JPM)’s 2.18% and Bank of America Corp (NYSE:BAC)’s 2.11%.

Net Benefits Of Rate Hike

Before the Federal Reserve announced its rate hike, Citigroup Inc (NYSE:C) indicated that it would gain $2 billion in revenue for every one percentage point in a rate hike. That meant the company stands to gain $500 million in revenue next year with the 25 basis points rate hike. The company could likely to gain another $725 million if the Central Bank hikes the interest rates by 25 basis points in March, June, and September. That would add total revenue of $1.25 billion next year provided the Fed opted to increase the rates. If the Fed slows down the phase of interest rate hike, then there would be the corresponding impact of generating additional revenue slowly.

Other than the revenue, Citigroup Inc (NYSE:C) has also been consistent in two things. One was to divest units that were not productive to it or not in line with its main focus. The second was the restructuring activities resulting in savings. These were much needed in the absence of the interest rate hike. The bank indicated that it would remove 2,000 jobs next month, and most of them would be in the back, as well as, the middle-office positions. Before the financial crisis, it had a workforce of approximately 374,000 and at the end of the September quarter, it was only 239,000. That represented a reduction of 36% in its workforce. It will be further down by 2,000 when it implements its recent actions. These actions would improve their operational efficiency in the upcoming quarters.

Industry-Lending Efficiency

Barclays has listed 53 picks for the year 2016, and Citigroup Inc (NYSE:C) was one among them. Its analyst, Jason Goldberg, cited two reasons for picking the stock, i.e. its unique position and the newly refocused franchise. Aside from that, he expects further scope for industry-lending efficiency apart from the continuous focus on cost effective measures. Also, he sees the company benefiting from increased capital returns and continued DTA utilization apart from an asset-sensitive balance sheet. While expecting a possible 1% increase in return on assets, the analyst expects the company to recommit its earlier goal of achieving a double-digit ROTCE ratio.

On a valuation basis, Citigroup Inc (NYSE:C) enjoys the lowest PE ratio currently with 9.04 times to the Street analysts’ earnings estimation of $5.75 per share for the next year. Wells Fargo & Co (NYSE:WFC)’s PE ratio is 12.29 to the next year earnings projection of the Street while Bank of America Corp (NYSE:BAC)’s PE ratio is 10.95 times to the 2016 consensus earnings. Another big bank, JPMorgan Chase & Co. (NYSE:JPM)’s PE is 10.54 times to the next year’s earnings estimations. That is a clear indication that the company’s stock offers more scope than any other banks in the top four slots. Also, 29 of the 34 analysts have rated the stock as Buy with the average price target of $63.5.


Citigroup Inc (NYSE:C) is a stock worth picking up for the next year on a number of parameters. For instance, it has been consistent in its NIM growth even when there was no interest rate hike. Its NIM was better than two of its rivals and commands lowest PE ratio than the rest of the three top banks. It has also been consistent in controlling costs. Therefore, one can place a safe bet on the stock as the year ahead would likely be a Banking year.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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